Cost of loans prohibitive for small companies, warns EEF

The availability of finance for small companies is improving, but at an increasingly prohibitive cost, according to a survey to be published this morning by the EEF manufacturers' organisation.

The findings question the effectiveness of the Government's "Project Merlin" agreement with the banks designed to unlock lending and smooth public anger over bonuses, the EEF says.

Although the balance of companies reporting easier access to lines of credit shows slight improvement in the first quarter, the improvement is offset by the 32 per cent reporting a hike in credit costs, up from 19 per cent in the previous three months.

More than a third of manufacturers reported an increase in the cost of new finance, the EEF says. Meanwhile, more than a quarter are expecting to need more external finance over the next 12 months.

"The improvement in lending towards the end of last year seems to have been short-lived," Lee Hopley, the EEF chief economist, said. "Until we see measurable progress on both cost and availability of credit, access to finance will remain the weak link in the Government's strategy for growth."

Smaller companies are facing tougher times than their larger counterparts. The proportion of small firms seeing an increase in borrowing fees rose from 17 per cent to 32 per cent, but only 6 per cent of larger groups reported a rise.